4 Points to Consider Before Getting In Bed With Venture Capital

These days, it seems like getting funded has become synonymous with building a successful company. I ask entrepreneurs how their business is going and the first words out of their mouths are “well, we’re really close to closing our Series A.” That’s not what I asked. Getting into bed with VC’s is much like getting into bed with a woman. If you don’t use protection you’ll liable to get pregnant, get married and have a subsequent relationship that you didn’t necessarily desire. So considering the potential consequences, it’s a fundamental best practice to contemplate whether or not you’re ready for jumping into such a relationship headfirst.

Whether the relationship flourishes or not, you both now have a baby together, something that isn’t easy to run away from. Given that previous to the Immaculate Conception, you had been dating for over a year, you’re not going to walk away from this without feeling some kind of pain.

Your marriage certificate (aka shareholders agreement) is signed and sitting in the drawer and you can’t divorce until you give your wife a nice return on her “investment”. If it doesn’t work out and you go bankrupt then that’s tough luck for both you and her.

So before you sign your freedom away, you should really take a long hard look and assess 2 critical criteria: First, does your business really need VC money (or are just doing it because that’s what startups supposedly do)? AND Second, are you ready to take that step right now? Just because the media says that everyone else is doing it, it doesn’t mean you have to. VC money might not be the key to your magical wonderland, in fact, without a clear direction and strategy, it may just become your kryponite, Superman.

How do you know if you’re ready for VC money? Well, in typical Barcinno style, I’ve laid out 4 preconditions you should thoroughly consider before thinking about raising money from VCs. If you don’t have a definite answer to the majority of these questions then you probably aren’t ready to dip your hand into the their pockets just yet.

1. Does your business have a unique value proposition?

Do you have a true competitive edge over everyone else in your space? Is your value proposition so unique that customers flock to you from the competition? VCs are looking to fund businesses that offer a truly distinctive solution and that can’t be duplicated easily. Not to say that you have to be the next Elon Musk, but VCs, like most people, get excited about the next big thing.

2. Is the opportunity big and can you scale?

I heard a great quote from Tom Perkins, Co-Founder of Kleiner Perkins Caufield & Byers, and early investor in Genentech and Tandem Computers in Something Ventured on Wednesday. “When we read a business plan, we start at the back and if the numbers are big, we look at the front to see what kind of business it is.”

How big can your business be? VCs traditionally look for a 10x+ return for their investors; can your business provide them with this? Will your startup be a €10M or €500M business in 5 years? Can you become 200x bigger than you are today? Although each VC comes from a different background and has varying priorities, they all want to see a big potential ROI.

Even if the opportunity is big, can your business model be scaled easily? Do you need a large workforce on the ground (Groupon) or can a small team run the international operations from anywhere in the world (Instagram)? If it’s not scalable then it’s not going to get funded.

3. Do you have a well-rounded management team that is qualified to grow the company?

Although not always so vital in determining whether you are ready for VC funding or not, the chances of raising money are always amplified if your team has a track record, i.e. previous exits, relationships with VCs, experience. The more attractive the team appears to the VCs and the more relevant skill sets and knowledge they have, the greater the probability of them achieving their goals within the startup. A good team at the helm of the ship will increase the probability of it not crashing into an iceberg.

Its important to be aware that 45% of VC backed startups change management within 18 months of closing the round. Let me repeat that: 45% of all VC backed startups change their management team within 18 months of closing the round. VCs usually work in clauses to have the right to replace the founders with external CEO’s and implement their own leadership styles to help them sleep easier at night, so although having an great team to start will help, it isn’t the be-all and end-all.

4. Do your metrics say, “Yay my business is growing”?

Have you validated the business model? What are your metrics showing; exponential growth of revenue and customer base or static movement? If your business metrics aren’t going in the right direction then, unless you have a revolutionary product or a super-ultra-genius-experienced team, it’s going to be tricky to get your hands on the money.

Although this is not a definite list, if you cannot provide positive responses to these key points then you probably aren’t ready for venture capital. If you do decide that this is the route you need to take then you should make sure you do a comprehensive study of the market to see which VCs fit the bill; which are active, which invest in your field, which you would like to work with so on and so forth.

Be conscious of the fact that when you make a VC baby, things change… Constant pressure to perform as a parent, to make money to support the child, to grow it into a successful adult and believe it or not, your wife/partner will want numerous board meetings to tell you what to do and how to be a better parent! You might even have to change the way you do things and if you are that bad at parenting then you might get replaced for someone else. The most successful businesses or children or whatever analogy you want to use, are due to their parents/founders having a shared sense of vision, determination and common goals so they can overcome all the problems they will encounter along the way.

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About Stewart Masters

Stewart Masters is the Editor-at-Large at Barcinno where he attempts to cover local startups and share his lessons learned as an entrepreneur. He has been creating companies for over five years and most recently co-founded @Clubkviar, a leading online reservations service for restaurants. His passions include responding to emails, watching humorous GIFs and spouting hyperbole. You can follow him here @Stewartdmasters or +StewartMasters